In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the following?

1. Lending to trade and industry bodies when they fail to borrow from other sources
2. Providing liquidity to the banks having a temporary crisis
3. Lending to governments to finance budgetary deficits

Select the correct answer using the code given below.

[UPSC Civil Services Exam – 2021 Prelims]

(a) 1 and 2 only

(b) 2 only

(c) 2 and 3 only

(d) 3 only

Answer: (b)        

Explanation:

• Statement 1 is incorrect as the lender of last resort, such as the RBI in India, does not provide loans to trade and industry bodies that are unable to obtain funding from other sources.
• Statement 2 is correct because the Reserve Bank, as the lender of last resort, offers financial support to troubled banks or institutions to safeguard the interests of depositors and prevent potential failures that could have adverse effects on other banks, institutions, and overall financial stability, thus impacting the economy.
• Statement 3 is incorrect because although the RBI does lend to governments to finance budget deficits, this function is separate from its role as the lender of last resort, which focuses on providing assistance to banks and eligible institutions facing financial difficulties.